2023-05-30 03:18:05 ET
Summary
- BigBear.ai operates in autonomous systems, cybersecurity, and supply chain/logistics, providing insights to customers to understand operational impacts.
- Q1 2023 backlog decreased by 10% year-on-year, while revenue growth rates remained in the mid-single digits. This is not a high-growth business.
- Profitability and cash flow concerns persist, with low gross margins and a significant cash burn rate.
Investment Thesis
BigBear.ai ( BBAI ) describes itself as a fast-growing business that is well-suited to leverage AI and machine learning to deliver customer insights.
In my previous article, I concluded by saying :
Does anyone truly mind that within the next 3 years BigBear.ai Holdings, Inc. has a debt stack that is more than 60% of its current market cap? I don't believe that's the game here. For now, it appears that despite the risks, it's all about AI stocks going to the moon. But in time, rational minds will prevail.
Since I wrote that conclusion, BigBear.ai reported its Q1 2023 results and the share price is down 24%.
Author's rating
In sum, here's why I caution investors from getting involved with this stock.
Why BigBear.ai? Why Now?
BigBear.ai's operations span autonomous systems, cybersecurity, and supply chain and logistics. BigBear.ai seeks to provide insights to customers to help them understand how known and previously unforeseen forces impact their operations.
BigBear.ai seeks to leverage big data so that customers' decision and course of action can best achieve their operational objectives.
Meanwhile, for Q1 2023, BigBear.ai's backlog ended down 10% y/y. Recall, bookings are a leading indicator of revenue growth rates to be recognized on the income statement. For a rapidly growing business, in high demand, you'd expect to see backlog increasing. And the faster the better. Not moving lower, as BigBear.ai's backlog did in Q1 2023.
Revenue Growth Rates Are Underwhelming
BigBear.ai's revenue growth rates are in the mid-single digits. That's despite the very easy comparables with the prior year.
What's more, despite all the hype surrounding AI, consider the following.
This was the guidance that BigBear.ai put out together with its Q4 2022 results. And now that the business world has picked up AI-fever? BigBear.ai reaffirmed its guidance.
Even though, as you can imagine, with AI literally in their name, and so much enthusiasm amongst business leaders for getting involved in this space, BigBear.ai does not appear to be yet benefiting from this high demand.
That's the overarching problem. But the story doesn't quite end here.
Profitability Profile is not Compelling
Above we can see that in Q1 2022 BBAI's gross margins were 27%, while around this time last year its gross margins were 24%.
Accordingly, not only is BigBear.ai business delivering very low gross margins, but it appears that, for now, the business isn't gaining much in the way of positive operating leverage.
Let me put it from another perspective, BigBear.ai ended Q1 2023 with approximately $22 million of cash and equivalents on its balance sheet. But against that cash, there's more than $190 million of debt.
Furthermore, keep in mind, that BigBear is still burning through substantial free cash flow. More specifically, BigBear is on a path to burn at least $40 million of free cash flow this year. Given that its balance sheet holds less than $22 million of cash, this will mean that BigBear.ai will be at risk of running out of cash soon.
What's more, note that this $22 million cash figure that BigBear.ai holds on its balance sheet is after BigBear.ai raised $22 million in cash in Q1 via a private placement in Q1.
For context, know that in 2022 BigBear.ai burnt through $49 million of free cash flow. Hence, my estimate that this year BigBear.ai burns through $40 million of free cash flow already factors in the possibility of improvement in its cash flow profile, given management's commentary that they expect the core business to reach breakeven in the second half of 2023.
The Bottom Line
The greater the number of people who believe in something, the more likely it is to be wrong. - Friedrich Hayek
At the start of any highly hyped period, there's bound to be a lot of capital chasing a sector. And while I feverishly believe that AI will massively change the way we operate in the world, I don't believe that BigBear.ai is the right way to invest in that trend.
Even though the stock is small and underfollowed, this doesn't mean that it's undervalued.
For further details see:
BigBear.ai: Beyond AI Hype